The proposed sale of Nexen Inc. to China National Offshore Oil Company (CNOOC) is being applauded by some as potentially opening the doors to Asian oil and gas markets and providing an assured source of capital for resource development. On the other hand, some regard it as yet another sale of Canadian petroleum resources to foreign interests that could have serious long-term implications for Canadian energy security.

Both views overlook the most pertinent factor: CNOOC is state-owned. Although shares of CNOOC Ltd. (the CNOOC subsidiary attempting to purchase Nexen) are publicly traded on the Hong Kong and New York stock exchanges, CNOOC Ltd.’s Chairman and Vice Chairman are also the Chairman and President, respectively, of CNOOC. CNOOC’s website clearly states that it is owned by the Chinese government and that its top executives are members of China’s ruling Communist Party. Therefore, in effect, Nexen would become a "crown" corporation, but one controlled by the government of China instead of Canada.

State ownership is out of fashion in Canada and for good reason, given the overwhelming evidence that government-owned companies perform poorly compared with privately-held enterprises. Private corporations are compelled by market forces to strive diligently to provide competitive returns to their shareholders whereas state-owned companies are guided by political objectives such as ensuring access to fuel supplies to support economic growth in the home nation. The literature on the subject provides ample evidence that government-owned enterprises are generally less productive, less efficient and therefore, less profitable than privately-owned companies.

Reduced efficiency arises from the fact that government-owned companies are not under pressure from shareholders to keep costs under control and to improve productivity. As pointed out by our colleagues Niels Veldhuis and Charles Lammam in an article published in The Fraser Forum several years ago, not only are private companies able to pay more dividends than state-owned companies as a consequence of greater profits but their capital expenditures tend to be greater.

Because state-owned CNOOC is not driven by market-based objectives, the proposed takeover is quite different than if a non-state-owned company were to make an offer for Nexen’s assets. In that case, with market forces bringing both parties together, there would be no need for the government to be involved at all. But CNOOC is primarily motivated by non-market considerations and certainly not driven by shareholders to seek the best possible returns.

While government should stay out of the way of true market transactions, takeovers by state-owned companies are simply not in the best interest of Canadians, given the long sorry record of such companies.

The Investment Canada Act, perhaps unwisely and necessarily, applies to foreign takeovers driven by markets as well as by governments. But aspects of the Act actually shed light on why takeovers by government-owned entities are ill-advised. According to Sections 20 and 21, Ottawa is obliged to consider whether the proposed takeover would be of "net benefit" to Canada. From the foregoing discussion, the answer to the ‘net benefit’ question should be obvious, especially since one of the determining factors laid out in the Act is: "the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada."

Because privately-owned enterprises are more productive, have greater profits and invest more, through time the "nationalization" of petroleum exploration and development companies through their sale to Crown or state-owned companies (such as Nexen to CNOOC) could be expected to seriously impinge upon the “level and nature of economic activity in Canada” -- another factor referred to in the Investment Canada Act in relation to the "net benefit" issue. A Canada with many state-owned enterprises involved in the petroleum resource sector -- the reality to which we appear to be headed given the thirst of state-run companies from energy-deprived Asia Pacific countries for our oil and gas resources and the takeovers that have already been approved -- would therefore be likely to have a lower, not greater, GDP.

Further, with lower profits as a consequence of the state-owned enterprises being less efficient, and reduced capital investment, the flow of revenues to governments in the form of corporate taxes and royalties would be reduced. Moreover, the flow of dividends to shareholders of companies in the oil and gas producing sector could be expected to be lower with fewer privately owned enterprises. Because public and private pension funds own shares of such companies, many Canadian pensioners would be affected and their reduced incomes and spending levels would have further undesirable consequences for Canada’s GDP.

Canadian experiments with government-ownership in the petroleum industry such as Petro-Canada, SaskOil, and Nova Gas Transmission Limited, were eventually privatized as governments discovered that the net benefits to the economy (and therefore to the governments involved) would be greater if the so-called Crown corporations were owned and operated by private investors. And that applies with at least equal force to a takeover by a foreign government-owned entity.